Abercrombie & Fitch Remains Resilient in Second Quarter
Abercrombie & Fitch continues to outpace its teen apparel peers, but outperformance already priced in.
Abercrombie & Fitch (ANF) continued to outpace its teen apparel peers during the second quarter, including a 9% increase in consolidated comparable-store sales (compared to the previously announced 14% plunge at Aeropostale (ARO) and our expectations of a mid-single-digit decline at American Eagle (AEO)) and 150 basis points of operating margin expansion to 5.1% despite a challenging raw material cost backdrop. Second-quarter results keep the company on track to meet our full-year expectations--including top-line growth in the high-teens and operating margins around 10%--and we are leaving our $62 per share fair value estimate unchanged.
Despite a somewhat cautionary tone from management about the flow-through of cost pressures during the back half of the year and increased macroeconomic uncertainty (not to mention management's tongue-in-cheek brand association concerns with MTV's The Jersey Shore), we expect A&F to outperform its peers for the remainder of the year and into 2012, driven by cleaner inventory positions and a generally more affluent target audience. Still, we believe the market has given the company too much credit for this outperformance, and we find the shares modestly overvalued at current levels. While we believe A&F warrants a premium valuation relative to its peers, we view many of the pressures facing other teen apparel retailers as more cyclical than structural in nature, and expect the valuation gap to normalize as macroeconomic conditions improve over time.
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